Client wants to pay himself via a re-fi on his rental.

[DebitThatCreditThis]

I have a client with a rental property in a single member LLC. He is currently refinancing and the re-fi can include "soft costs" such as architectural and construction management fees.

Since he performed those services himself (he is an architect) he is looking to pay himself.

He is looking to pay himself $100,000 and curious about the tax consequences.

The way I understand it is he would essentially be paying himself via the rental's equity (aka a distribution).

Not sure how to advise him on this one, any input is appreciated!

[Dude]

A refinance is a loan so there are no tax consequences other than a possible increase in deductible mortgage interest.

[BOB W]

May have a problem with "Interest tracing" expense???

[Rapid Robert]

"A refinance is a loan so there are no tax consequences other than a possible increase in deductible mortgage interest."

Simply taking a cash-out refinance on a rental mortgage does not result in any increase in deductible mortgage interest (unless the refinance was to a higher rate, but who would do that?) Only loan proceeds used to buy, build, or improve the property generate tax deductible interest expense.

"He is looking to pay himself $100,000 and curious about the tax consequences."

Either neutral, or an increase in tax. If he thinks he can get a tax deduction for the value of his own labor, he is very mistaken. So, he either has taxable "other" income of $100K and the same amount of rental expense deduction (a wash), or more likely he has additional self-employment tax on the $100K that would put him net in the hole.

There is no way he gets an interest expense deduction or other deduction for money he did not pay to an architect or construction manager. But he can certainly take the cash out amount from the refi and do whatever he wants with it - but no tax break.